As the dust begins to settle on the implosion of the cryptocurrency exchange QuadrigaCX, following a June report from the Ontario Securities Commission (OSC), experts hope investors may be a little more clear-eyed when looking to use such platforms.
“Don’t leave Bitcoin on the exchange. That was the lesson with Quadriga,” says Shaun Cumby, chief investment officer of Toronto-based 3iQ Corp. “Look into who you’re dealing with [and] don’t assume that just because somebody deals in money, they’re safe.”
QuadrigaCX collapsed in 2019, leaving more than 76,000 investors from Canada and around the world collectively out-of-pocket for at least $169 million. Following a 10-month investigation, the OSC released a report stating that the crypto company was a Ponzi scheme.
“Clients entrusted their assets to Quadriga, which provided false assurances that those assets would be safeguarded,” reads the OSC report. “In reality [Gerald Cotton, Quadriga’s co-founder and CEO] spent, traded and used those assets at will.”
In some cases, individuals who used Quadriga believed their money was safe because Quadriga was a Canadian financial company that was expected to keep their assets safe, like a bank. However, leaving money on an exchange – any exchange – is not always a good idea.
“If you went to the bank and you withdrew $10,000, would you leave it on the counter and say, ‘I’m going to come back for this tomorrow?’ The answer would be, well, of course not,” says Cumby. “But leaving your Bitcoin on the exchange platform was the equivalent to leaving your $10,000 cash on a counter at the bank.”
Crypto exchanges instead are a place where individuals simply exchange their Bitcoin (or other cryptocurrency) for fiat currency or vice versa. The proceeds of the exchange should be held in a digital wallet, says Cumby.
A digital wallet is a software program that holds cryptocurrency. The wallets can be kept on a smartphone, computer or other hardware devices. Cryptocurrency can also be held by a custodian, although Cumby points out that due diligence is required to make sure such companies are properly capitalized and regulated.
The wallet is connected to a private key that’s similar to a password, which secures the cryptocurrency to that wallet. The wallet is “unlocked” when a private key is used with a public key that is visible on the blockchain platform.
“Not your keys, not your coins” is a common maxim in the cryptocurrency space and it points to the fact that to hold cryptocurrency securely, an individual must have control over the private keys.
Of course, there are some people who consider managing their own keys “a nightmare,” says Dina Mainville, sales director for Canada, Bermuda and the Caribbean with Menlo Park, Calif.-based CipherTrace Inc.
Where individuals delegate the task, they take on risk because regulation of exchanges is still developing.
As such, when looking to use a cryptocurrency exchange, it’s imperative to do some due diligence on its operations, says Mainville. She suggests talking to the exchange owners about their risk management program, and researching whether the exchange has a compliance officer on staff and what the jurisdictional requirements of the organization are.
As of June 1, 2020, for example, all Canadian exchanges were required to register with the Financial Transaction and Reports Analysis Centre of Canada (FINTRAC). Individuals should also look at the exchange’s practices for safeguarding assets, Mainville adds.
Indeed, when it comes to such requirements, Mainville points out that the OSC report shows how the industry, and Bitcoin in particular, is evolving and moving towards regulation.
“[The OSC report] just signifies that this is a coming of age for crypto,” says Mainville, who also works in industry engagement with the Travel Rule Information Sharing Alliance (TRISA), which sets standards for virtual asset companies and secures data transmission.
Says Mainville: “I think that we are working towards reaching maturation as an industry and regulatory oversight is on its way.”